In 1999, Coca-Cola began testing vending machines that automatically raised prices during the summer heat. Since your desire for an ice-cold Coke grows as the temperature rises, shouldn’t it cost more too?
Then-CEO Douglas Ivestor certainly thought so, but customers were furious. People tossed around the term “price gouging” and Pepsi was quick to point out that Coca-Cola was taking advantage of people in hotter climates. Coke suffered some intense public backlash before pulling the idea entirely and hiring a new CEO that very same year.
The amazing thing is that Coca-Cola survived the PR nightmare and has rebounded to remain one of the biggest and most valuable brands in the world. One reason for Coca-Cola’s preeminence, of course, is that customer brand loyalty is so strong that many are willing to look past mistakes like that and carry on with their purchasing habits.
Most execs would pay good money for an insurance policy like that.
How much money, exactly? Well, that’s where things get tricky. If you think it’s difficult to measure something as intangible as a brand, you’re not wrong.
How Do You Measure A Brand’s Value?
Coca-Cola’s brand has dominated at the top of Interbrand’s Biggest Global Brands list for over 15 years, which is as long as they’ve measured it. According to Interbrand’s 2016 numbers, the Coca-Cola brand is worth $73.1 billion, competing with the likes of Apple and Google.
Isn’t that amazing? Coca-Cola’s brand has been able to stay competitive with the world’s biggest tech gods despite changing consumer habits and government sugar regulations.
That is, if you believe Interbrand’s valuation. The $73.1 billion number comes across as an objective statement but it’s not the only valuation out there. Forbes calculates Coca-Cola’s brand at $56.4 billion while Brandirectory measures it as low as $34.2 billion. (You can imagine which number Pepsi’s CEO prefers.)
Why the huge disparity? It turns out that there is just as much subjectivity in developing a brand valuation formula as there is objectivity in running the calculations.
According to Interbrand’s website, their valuations are based on three key components: “the financial performance of the branded products or services, the role the brand plays in purchase decisions, and the brand’s competitive strength.”
Financial analysis seems simple enough. But it’s far trickier to determine brand strength or the role a brand plays in purchasing decisions.
To learn more, I chatted with Kyu Lee, a professor of marketing at Syracuse University’s Whitman School of Management.
“The simplest way to estimate brand value is to use what I like to call the ‘Willingness to Pay’ test,” Lee told me. “You give consumers two containers of chips of identical quality. One says Pringles, and the other is a no-name brand. And you see how much more consumers are willing to pay for the Pringles.”
This plays out in real-time every time you go to the store. Will you choose the generic drugstore version of Ibuprofen or spring for the more-expensive Advil? Will you get the branded milk or the cheaper grocery option?
Of course, the Willingness to Pay test is only one piece of a much larger puzzle. Determining the exact value of a brand requires measuring countless intangibles.
“When Coca-Cola introduces a new and unproven beverage, the market is willing to give it the benefit of the doubt,” Lee pointed out. “How much monetary value should you assign to that privilege?”
And what about the value of having a brand that attracts top talent? Or one that helps salespeople close deals? How much should we value the “insurance policy” that allows Coca-Cola to recover from its price surging experiment in the ‘90s? (And how does that policy compare to Uber’s?)
“How you tie all those numbers into a brand valuation is both an art and a science,” said Matt Certo, the CEO of Findsome & Winmore. “Depending on how much weight you give these factors in your formula, you may calculate very different valuations for the same brand.”
Who Cares What A Brand Is Worth, Anyway?
Before we go any further, let’s be clear that determining a brand’s value isn’t just a fascinating pedagogical exercise. While it will undoubtedly make you the hero of your next cocktail party, brand valuation discussions can also lead to multi-billion dollar decisions, like when Amazon bought Whole Foods in June for a cool $14 billion. You can bet that a company with the same financial statements and weaker brand loyalty would have made a far smaller dent in Amazon’s checkbook.
Brand valuations have wider implications too.
“Let’s say a new Star Wars movie comes out and toy makers want to do a licensing deal using the brand name. In those kinds of transactions, parties need to ultimately agree on a dollar value,” Lee explained.
Or let’s say you’re a brand manager. At some point you’ll want to know how much your brand contributes to the financial success of the company. If you can’t determine whether your brand’s equity is improving, and to what extent, you’ll have a hard time understanding which branding and marketing efforts are effective and which are a waste of time and money.
Have We Been Going About It All Wrong?
Coca-Cola's brand is worth $73.1 billion, according to Interbrand. But that may not be the most effective way of measuring brand value. (Photographer: Akos Stiller/Bloomberg)
One major flaw of the Interbrand method -- and most major brand valuation methods, for that matter -- is that it assigns a single, all-encompassing valuation that doesn’t take into account a diverse and segmented marketplace.
That is, Coca-Cola’s $73.1 billion brand valuation is easy to digest, but it doesn’t tell you who values the brand or how that number breaks down among different regions and consumers.
“What really matters is the brand’s equity among the targetcustomers, not the average preference among all potential buyers,” Lee told me.
Is Coca-Cola’s brand worth more in the United States or in emerging markets? Is it worth more among busy suburban mothers or single urban men?
The answers to these questions are important but cannot be answered with one global number.
It’s the same reason presidential polls break results down to accommodate different demographic segments and geographic regions.
For brand managers who need more specificity, there are alternative, more microscopic, methods based on the analysis of market data. One example is called “part-worth,” an analysis that determines how much extra a buyer is willing to pay because of the brand. Another is 3A, the awareness-attractiveness-availability analysis, which shows how much of additional market share it allows you to capture.
But even these alternative brand valuations don’t do a great job of incorporating data from online communities and social media. That’s a major problem given how much of the consumer-brand relationships today play out online. To ignore that data is to ignore a huge piece of the brand valuation puzzle.
There are lots of ways to measure fandom and brand affinity online -- earned media coverage, followers, mentions, and the like. Again, the trick is to incorporate those numbers into cohesive brand valuations depending on demographic and geographic segments.
“There is fairly broad recognition that this information has been overlooked, but it just hasn’t been integrated in a sophisticated way yet,” said Lee.
The Best Brand Value Of All
Remember the Twinkies story? When Hostess declared bankruptcy in 2012 and the Twinkies product was discontinued, millions of Twinkies fans responded with outrage and disappointment. Some very smart people acquired the business and resurrected it to tap into that undying brand loyalty.
It’s the same kind of steadfast devotion that Apple fans show when the company makes its own products incompatible with one another without buying extra cables. And it’s the same sort of loyalty that Coca-Cola enjoyed when they tried their price surge experiment and failed.
‘You can’t replace the strength of a brand’s values and the emotions it makes people feel,” said Bob D’Loren, Founder and CEO of Xcel Brands.
Perhaps this, more than anything, encapsulates the value of a brand. There’s certainly a benefit in having better products at better price tags, but how they make us feel is typically a much more powerful incentive. Having loyal fans who are willing to look past corporate blunders, who won’t even let you leave the market when you hit hard times? That’s priceless.
Originally published on Forbes.com.